Client question – reducing CGT liability
‘I own a 3 ha property, land purchased pre-CGT. The main house was built in 1987, pre-dating the 1991 cut-off for claiming maintenance costs against accumulated capital gains on sale.
In 1993, I built a separate large double garage/workshop on the property.
The property has always been a holiday house, never anyone’s principal residence or rented.
The property is on sale; I am advised CGT will apply to the proceeds.
Can I reduce CGT liability by apportioning part of the total post-1993 maintenance costs to the 1993 construction, eg by a ratio of house:workshop to reduce CGT impact??
Any advice will be greatly appreciated.‘
Answer from Chan & Naylor partner – Clive Nelson
The disposal of this property will have a number of capital gains tax scenarios. The land itself being acquired pre September 1985 will not be subject to CGT.
Depending on the value of the 1987 improvements being the house will determine whether it may be subject to CGT. The expense limit for an asset improvement in 1987 was $58,859. Any asset improvement greater than $58,859 results in a separate CGT asset being created.
The same situation applies for the garage/workshop that was developed in 1993. Provided this structure has a development cost of less than $80,036 it will form part of the original pre CGT asset being the land. If greater than $80,036 it will again be a separate CGT asset.
Depending on whether the garage workshop is recognised as a CGT asset will determine whether the 20 August 1991 rules regarding the maintenance of the garage/workshop will apply. If the asset is subject to CGT then maintenance costs associated with the structure may be applied. This would include interest costs on any borrowing to construct the asset, as well as a pro rata portion of other maintenance costs associated with the property improvements.
So when this property is sold, and if any of the property is subject to CGT, you will require an assessment of the value of the land as well as the two property improvements to determine the capital gains tax applicable to that particular portion of the sale.
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.